2025 (7) TMI 368 - AT - Income Tax

Taxability of recovery in respect of bad debts written off not allowed as deduction - HELD THAT - As decided in own case 2024 (11) TMI 1188 - ITAT MUMBAI AO has held the recovery to be taxable for the reason that the adjustment made to the provision is indirectly charged to P L A/c. This scenario is considered in the above decision and therefore respectfully following the same we hold that the recovery of bad-debts which has not been claimed as a deduction u/s 36(1)(vii) in earlier years is not taxable. Accordingly the AO is directed to delete the addition made in this regard. Disallowance of FCTR (Foreign Currency Translation Reserve) relating to monetary items - this claim was disallowed as the same was not routed through the P L account - HELD THAT - We find that the treatment given in accounts is strictly as per the RBI norms which require the transitional difference arising on account of the restatement of accounts of foreign branches is to be credited/debited to FCTR. We further find that for the purposes of tax the assessee had segregated the amount of FTCR relating to monetary items and since it was a loss claimed the same as deduction. We further find that this action of the assessee is in accordance with the binding Income Computation and Disclosure Standard (ICDS)-VI relating to effects of changes in Foreign Exchange Rates. It is pertinent to mention here that in earlier years since there was gain the same has been accepted by the AO and taxed accordingly. Therefore following the same principle we do not find any reason to disallow the loss and the same is directed to be allowed. Ground No. 3 is allowed. Disallowance of interest expenses incurred on Innovative Perpetual Debts Instruments (IPDI) Bonds - HELD THAT - As decided in own case 2024 (11) TMI 1188 - ITAT MUMBAI interest claimed by the assessee is allowable as deduction u/s 36(1)(iii) and the AO is directed to delete the disallowance made in this regard as observed assessee has categorically explained to the assessing officer with relevant supporting material that it has issued unsecured perpetual non-convertible debentures and such lenders were not entitled to share any surplus or bear any loss like shareholders. These debentures were entitled for fixed year. Addition of interest accrued but not due - assessee explained that the interest on these securities is payable only on the respective due dates and therefore they accrue only on the said due dates and bank does not have the right to claim the interest before the due dates specified in the bonds and hence the interest on these securities accrues and becomes income only on the said due dates. Therefore the interest accrued but not due cannot be taxed - HELD THAT - We find that an identical quarrel was decided in the case of Credit Suisse First Boston (Cyprus) Ltd. 2012 (8) TMI 17 - BOMBAY HIGH COURT as held right to receive interest on the Government securities vested in the assessee only on the due date mentioned in the securities. Consequently interest accrued on the securities only on the due dates and could not be said to have accrued to the assessee on any date other than the date stipulated therein. In respect of the securities held by the assessee on March 31 2001 the due date for payment of interest thereon had not arrived on March 31 2001 and the assessee sold some of such securities 1... prior to the next due date for payment of interest. It was only the holder of the security on such date to whom interest could be said to have accrued. In any event interest did not accrue to the assessee on March 31 2001 as admittedly interest was not payable on that date under the terms of the securities. The appellate authorities therefore rightly deleted the addition by the AO as interest income. Disallowance of the write-off of bad and doubtful debts claimed u/s/ 36(1)(vii) - AO found that the assessee has made the provision on bad debt and doubtful debts - AO was of the opinion that since the amount is provision and not writ-off the same cannot be allowed as a write-off thus disallowed the claim which was confirmed by the CIT(A) - HELD THAT - It is true that provisions for bad and doubtful debts are not allowed but it is equally true that the treatment given in the balance sheet is paramount. All that we have to see is whether by the impugned provision the assets side is reduced. If the assets side are reduced by the amount of provision the same amounts to writ-off and has to be allowed. Our view is fortified by the decision of the Hon ble Supreme Court in the case of M/s Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT Thus we direct the AO to delete the impugned addition. Ground No. 6 is allowed. Disallowance of the exclusion of profit of Foreign Branches - assessee has claimed deduction relating to profit earned by the Sydney branch based on section 90 of the Act - As per the CBDT notification the income of foreign branches is required to be considered for tax in the resident state of the resident assessee thus AO made disallowance which was confirmed by the CIT(A) - HELD THAT - We find that the coordinate bench in the case of Bank of India 2020 (12) TMI 862 - ITAT MUMBA has decided this quarrel in favour of the revenue and against the assessee. Taxability of the income of foreign branches as per the local laws of the respective country - HELD THAT - A similar issue has been decided against the assessee in the case of the Bank of Baroda 2017 (2) TMI 1422 - ITAT MUMBA wherein Tribunal had held that the income of the foreign branches of the assessee shall also be taxable in India that is it would be included in the return income filed by the assessee in India and whatever taxes have been paid by the branches in the other countries credit of such taxes shall be given. We find that the Tribunal as above has not held that it is only that income of the foreign branches which was taxed in that foreign country which is to be included in the return of income filed by the assessee. Hence we are in agreement with the revenue plea that Ld. CIT-A has not properly followed the Tribunal decision as referred by him. A reading of the notification canvassed by assessee also does not help the case of assessee. The notification also does not support the direction of Ld. CIT-A. The doctrine of stare dicisis mandates that we follow the coordinate bench decision as above and hoid that the income of the branches of assessee situated abroad shall also be taxable in India and whatever tax have been paid by the branches in the foreign country credit of such taxed shall be given. MAT computation - non-granting of credit towards foreign taxes in computing book profits - HELD THAT - An identical issue has been decided by the coordinate bench in 2024 (11) TMI 1188 - ITAT MUMBA for AY 2016-17 wherein held that provisions of section 115JB are not applicable to assessee bank. Disallowance of compensatory payments treating them as penalty - HELD THAT - An identical issue was decided by the coordinate bench in the assessee s own case 2024 (11) TMI 1188 - ITAT MUMBA as held Explanation-1 to section 37 provides that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to be incurred wholly and exclusively for the purpose of business or profession and no deduction shall be allowed in respect of such expenditure. In the above decision of the Co-ordinate Bench the ratio laid down is that the penalty levied by RBI for violation of internal regulations does not fall within the purview of Explanation-1 to section 37. In the given case the amount claimed as deduction by the assessee is with regard to the levy by the RBI for non-compliance of internal regulations with respect to maintenance of currency chest. Addition of doubtful debts as per Rule 6EA - HELD THAT - As decided in 2024 (11) TMI 1188 - ITAT MUMBA we uphold the decision of the CIT(A) in deleting the addition made towards interest on NPA. Broken period interest - HELD THAT - An identical issue was decided by the coordinate bench in the assessee s own case 2024 (11) TMI 1188 - ITAT MUMBA to hold that the AO is not correct in making the disallowance towards broken period interest and accordingly we see no infirmity in the order of the CIT(A) in deleting the said disallowance. Disallowance of amortisation of premium paid on securities in HTM category - A similar issue was decided by the coordinate bench in the assessee s own case 2024 (11) TMI 1188 - ITAT MUMBA held ITAT is right in law in holding that the assessee is entitled for deduction with respect to the diminution in value of investment and amortization of premium on investment held to maturity on the ground of mandate by RBI Guidelines. Disallowance made u/s 14A r.w. rule 8D - assessee has earned tax free income from Bonds and dividend income on shares held as stock-in-trade - HELD THAT - As exempt income earned by the assessee is out of the shares/stock held as stock-in-trade therefore respectfully following the decision of the Co-ordinate Bench in assessee s own case 2020 (11) TMI 1076 - ITAT MUMBAI we direct the AO to delete the disallowance made u/s 14A r.w.r. 8D. Further No disallowance u/s 14A r.w. Rule 8D in computing book profit u/s 115JB.

Summary

The legal questions considered in the appeals pertain to multiple tax issues arising in the context of assessment years 2020-21 and 2021-22 involving a banking entity. The core issues include:

1. Whether disallowance under section 14A read with Rule 8D of the Income Tax Rules is warranted for exempt income earned on shares/stocks held as stock-in-trade.

2. Taxability of recovery in respect of bad debts written off but not allowed as deduction earlier.

3. Allowability of loss claimed on Foreign Currency Translation Reserve (FCTR) relating to monetary items.

4. Deductibility of interest expenses incurred on Innovative Perpetual Debt Instruments (IPDI) bonds.

5. Taxability of interest accrued but not due on securities.

6. Allowability of write-off of bad and doubtful debts claimed under section 36(1)(vii) of the Income Tax Act.

7. Exclusion or inclusion of profits of foreign branches in the taxable income of the resident assessee and related issues of foreign tax credit and applicability of Minimum Alternate Tax (MAT) under section 115JB.

8. Disallowance of compensatory payments treated as penalty under section 37(1).

9. Tax treatment of doubtful debts as per Rule 6EA.

10. Treatment of broken period interest paid on securities.

11. Disallowance of amortization of premium paid on Held To Maturity (HTM) securities.

12. Applicability of disallowance under section 14A read with Rule 8D in computing book profits under MAT provisions.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D for Exempt Income on Shares/Stock-in-Trade

Legal Framework and Precedents: Section 14A read with Rule 8D permits disallowance of expenditure incurred in relation to exempt income. The Supreme Court in Maxopp Investment Pvt. Ltd. held that where shares are held as stock-in-trade, the business activity involves dealing in shares, and dividend income is incidental and not exempt income attracting disallowance under section 14A.

Court's Reasoning: The Tribunal followed coordinate bench precedents holding that no disallowance under section 14A r.w. Rule 8D is warranted where exempt income arises from shares/stocks held as stock-in-trade. The rationale is that dividend income in such cases is part of business income, not exempt income, and hence no disallowance is justified.

Application to Facts: The facts for AY 2020-21 and AY 2021-22 were identical to earlier years where the coordinate bench had ruled in favor of the assessee. The exempt income was earned on shares held as stock-in-trade.

Conclusion: The disallowance under section 14A r.w. Rule 8D was deleted, allowing the assessee's appeal on this ground and dismissing the revenue's corresponding ground.

2. Taxability of Recovery of Bad Debts Written Off Not Allowed as Deduction

Legal Framework and Precedents: Provisions under sections 36(1)(viia), 36(1)(vii), and 41(4) govern deduction for bad debts and taxability of recoveries. The Supreme Court and coordinate benches have analyzed the two streams of deductions: provisions made as per RBI norms (first stream) and actual bad debts written off (second stream). Section 41(4) taxes recovery only if deduction was allowed under the second stream.

Court's Reasoning: The Tribunal noted that if no deduction was allowed under section 36(1)(vii) for the bad debts written off, recovery of such bad debts cannot be taxed under section 41(4). The AO's addition was based on an incorrect assumption that adjustment to provision indirectly charged to P&L account renders recovery taxable.

Application to Facts: The assessee had not claimed deduction under the second stream for the bad debts written off. Therefore, recovery was not taxable.

Conclusion: The addition made by the AO was deleted and the ground allowed in favor of the assessee.

3. Disallowance of Foreign Currency Translation Reserve (FCTR) Losses

Legal Framework and Precedents: RBI norms require that foreign branch accounts be restated, with exchange differences credited/debited to FCTR. Income Computation and Disclosure Standard (ICDS)-VI governs recognition of exchange differences for tax purposes, allowing recognition of exchange losses on monetary items.

Court's Reasoning: The assessee's accounting treatment complied with RBI norms and ICDS-VI. Earlier years' gains were accepted and taxed. Following the principle of consistency, losses should similarly be allowed.

Application to Facts: The AO disallowed the loss as it was not routed through P&L account, but the Tribunal held that the treatment as per RBI norms and ICDS is binding.

Conclusion: The loss on FCTR relating to monetary items was allowed as deduction.

4. Disallowance of Interest on Innovative Perpetual Debt Instruments (IPDI) Bonds

Legal Framework and Precedents: Section 36(1)(iii) allows deduction of interest on borrowed funds. The coordinate bench in the case of Tata Power Co Ltd held that perpetual bonds are not equity and interest on such bonds is deductible. The distinction from dividends is that interest is mandatory and payable irrespective of profits.

Court's Reasoning: The Tribunal observed that IPDI bonds are unsecured perpetual securities with fixed interest payable and no equity-like features. Therefore, interest paid is deductible as business expenditure.

Application to Facts: The facts were identical to those in the coordinate bench decision; hence, the disallowance was set aside.

Conclusion: Interest on IPDI bonds was allowed as deduction under section 36(1)(iii).

5. Addition of Interest Accrued but Not Due

Legal Framework and Precedents: The Bombay High Court in Credit Suisse First Boston (Cyprus) Ltd held that interest accrues only on the due date specified in the instrument. Interest accrued but not due is not taxable as income.

Court's Reasoning: The assessee's securities stipulated interest payable only on specified dates. The AO erred in taxing interest accrued before due date. The Court emphasized the distinction between the debt claim and the interest income, and that interest accrues only when the right to receive it becomes enforceable.

Application to Facts: The assessee claimed that interest accrued only on due dates; AO's addition was contrary to binding precedent.

Conclusion: The addition was deleted, and the ground allowed.

6. Disallowance of Write-off of Bad and Doubtful Debts under Section 36(1)(vii)

Legal Framework and Precedents: The Supreme Court in M/s Vijaya Bank clarified that for deduction under section 36(1)(vii), actual write-off requires not only debiting P&L account but also reducing loans and advances on the asset side, so that net loans reflect the provision. Mere provision without write-off is not deductible.

Court's Reasoning: The Tribunal noted that the assessee had reduced the asset side by the provision amount, effectively writing off the bad debts. The AO's insistence on closing individual debtor accounts was rejected as impractical and unnecessary. Subsequent recoveries are taxable under section 41(4), preventing double claims.

Application to Facts: The assessee complied with the accounting treatment as per law and was entitled to deduction.

Conclusion: The disallowance was deleted and the ground allowed.

7. Exclusion of Foreign Branch Profits and Related Issues

Legal Framework and Precedents: Section 90 of the Income Tax Act and relevant Double Taxation Avoidance Agreements (DTAAs) govern taxation of foreign branch income. The coordinate bench in Bank of India held that foreign branch profits are includible in Indian taxable income, with credit for foreign taxes paid. The Supreme Court in PVAL Kulandagan Chettiar was discussed but held to be overtaken by subsequent legal changes. The method of relief is credit method, not exemption.

Court's Reasoning: The Tribunal rejected the assessee's plea for exemption of foreign branch income, holding that global income is taxable in India with relief by foreign tax credit. The assessee's reliance on earlier decisions was overruled by recent coordinate bench rulings. The notification under section 90(3) was held valid. Also, the assessee's claim that branch income taxed abroad should be excluded was rejected.

Application to Facts: The AO disallowed exclusion of foreign branch profits; the Tribunal upheld this disallowance.

On applicability of MAT under section 115JB: The Tribunal held that the assessee bank, constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, is not a company under the Companies Act and hence not liable to MAT under section 115JB. The deeming fiction in section 11 of the Acquisition Act applies only for Income Tax Act purposes and does not make the bank a company under the Companies Act.

Conclusion: The exclusion of foreign branch profits was disallowed; foreign tax credit issues and MAT applicability were decided accordingly.

8. Disallowance of Compensatory Payments Treated as Penalty

Legal Framework and Precedents: Explanation 1 to section 37(1) disallows deduction for expenditure incurred for any offence or prohibited by law. The coordinate bench in IDBI Bank held that penalties for non-compliance of internal regulations, which are compensatory and not punitive, are allowable deductions.

Court's Reasoning: The payments to RBI for deficiencies in currency chest were for non-compliance of internal guidelines, not offences or criminal penalties. Therefore, Explanation 1 to section 37(1) did not apply.

Application to Facts: The AO disallowed the expenditure treating it as penalty; CIT(A) and Tribunal allowed deduction.

Conclusion: The disallowance was deleted and the ground dismissed.

9. Deletion of Doubtful Debts as per Rule 6EA

Legal Framework and Precedents: Section 43D and Rule 6EA provide that interest on NPAs is taxable on receipt or credit to P&L account as per RBI guidelines. The Bombay High Court in American Express Bank Ltd held that interest on NPAs not credited to P&L account is not taxable.

Court's Reasoning: The assessee followed RBI guidelines in not recognizing interest on NPAs on accrual basis but on receipt or credit. The AO's addition was contrary to binding precedents.

Application to Facts: The Tribunal upheld CIT(A)'s deletion of addition.

Conclusion: The ground was dismissed, sustaining the deletion.

10. Broken Period Interest

Legal Framework and Precedents: The Supreme Court and Bombay High Court have held that broken period interest paid on purchase of securities is allowable as revenue expenditure and not part of purchase price.

Court's Reasoning: The Tribunal relied on binding Supreme Court and High Court decisions rejecting AO's disallowance.

Application to Facts: The assessee claimed deduction for broken period interest; AO disallowed; CIT(A) and Tribunal allowed.

Conclusion: Disallowance was deleted.

11. Amortization of Premium on HTM Securities

Legal Framework and Precedents: RBI guidelines require amortization of premium on HTM securities. The Bombay High Court in HDFC Bank Ltd upheld deduction for amortized premium despite contrary Supreme Court decision in Southern Technologies.

Court's Reasoning: The Tribunal followed binding High Court precedent allowing deduction.

Application to Facts: The AO disallowed; CIT(A) and Tribunal allowed.

Conclusion: Disallowance was deleted.

12. Disallowance under Section 14A read with Rule 8D in Computing Book Profit under MAT

Legal Framework and Precedents: Since the Tribunal held section 115JB (MAT) provisions not applicable to the assessee bank, disallowance under section 14A for book profit computation was rendered infructuous.

Conclusion: Ground became infructuous.

Significant Holdings:

"Thus, in the light of the decisions discussed above, we hold that no disallowance under section 14A r.w.r. 8D of the Act is warranted where the assessee has earned exempt income on shares/stocks held as 'stock-in-trade'."

"The provisions of section 41(4) of the Act which provides for taxing the recovery effected out of the bad debts written off, therefore, clearly stipulates that the said recovery will be taxed if a deduction has been allowed in respect of bad debts written off which falls under the second stream of deductions."

"The treatment given in the accounts is strictly as per the RBI norms... This action of the assessee is in accordance with the binding Income Computation and Disclosure Standard (ICDS)-VI relating to effects of changes in Foreign Exchange Rates."

"The assessee company had also stated... that it had borrowed funds for the purpose of its business and the interest on debenture was deductible in computing the income from profit and gains from business and profession."

"When an instrument or an agreement stipulates interest to be payable at a specified date, interest does not accrue to the holder thereof on any date prior thereto."

"After the insertion of the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously, also to reduce loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that at the end of the year the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt."

"The income of the foreign branches, covered by tax treaties with respective jurisdictions, is to be included in the taxable income of the assessee in India and credit for taxes paid abroad is to be given."

"The penalty levied by RBI for violation of internal regulations does not fall within the purview of Explanation-1 to section 37."

"Where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received."

"The interest paid for broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities."

"The provisions of section 115JB are not applicable to the banks constituted as 'corresponding new bank' in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970."